PÖYRY POINT OF VIEW - NOVEMBER Solar in the Middle East - How to realise the benefits

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1 PÖYRY POINT OF VIEW - NOVEMBER 2017 Solar in the Middle East - How to realise the benefits

2 How can world record auction prices be harnessed to deliver lower electricity costs? 2017 HAS BEEN REMARKABLE... LCOE WILL START TO BECOME A LESS INTERESTING METRIC The Middle East electricity sector is about to go through a period of significant change. LCOE receives a lot of discussion in the region and is a useful starting point for a comparison of technologies. Figure 1 shows our estimate of the LCOE of various technologies. Solar PV is the clear winner of the LCOE competition. Saudi Arabia s tender has demonstrated that its LCOE is less than $25/MWh and perhaps less than $20/ MWh. While LCOE is a useful metric, it is incomplete. The value of electricity produced depends on when it is generated and how much is delivered. For example: PV does not generate during darkness... at 17:00, PV will typically be generating at less than 20% of its maximum at a time when demand is increasing due to lighting demand. CCGTs or CSP with thermal are dispatchable at this time. PV may lead to an excess of generation during peak sunlight hours. Experience from other markets suggest that system inertia requirements will mean that PV cannot contribute more than 50% of generation requirements at any given time. As PV penetration increases, it may be necessary to curtail PV during such periods saw world record bids for solar PV in Dubai and Abu Dhabi has surpassed this with some truly incredible tender results for solar PV and CSP: In September 2017, an ACWA Power / Shanghai Electric consortium was announced as the preferred bidder for a 700MW CSP project in Dubai with a LCOE 1 of $73/MWh. In October 2017, a Masdar / EDF consortium was announced as the low bidder for a 300MW PV project in Saudi Arabia with a price of $17.8/MWh. These results mark significant progress in solar technology and the optimisation of design and the supply-chain. NEW QUESTIONS NOW ARISE Headline numbers and world records are great. However, the sector should not lose sight of focussing on how to harness this technological progress to improve security of supply and reduce cost to consumers. The sector has been digesting the tender results over the past couple of weeks and there are a number of questions which are being repeatedly asked: What generation mix will meet demand at the least production cost? How should different technologies be compared and evaluated? What is the role for energy in enabling the roll out of solar? This article does not offer conclusive answers to these questions developing these will require the focus of the sector in the coming years. We offer here our insight in to the best way to approach them drawing on our international experience in market analysis and design over the last twenty five years. FIGURE 1 LCOE OF DIFFERENT FORMS OF TECHNOLOGIES LCOE ($/MWh) OCGT Rooftop PV CSP (thermal ) Nuclear Coal CCGT Utility PV PV + 4h battery Battery cost Fuel opex Non-fuel opex Levelised capex Notes: These are generic illustrative numbers based on Pöyry s assumptions and 4% real project WACC. Fuel prices are net-back international prices delivery for a good quality GCC site. 1 PÖYRY POINT OF VIEW 1 Levelised Cost of Energy PÖYRY POINT OF VIEW 2

3 TABLE 1 COMPARING PV AND CSP IS NOT STRAIGHTFORWARD CSP Battery Comment WHAT NEEDS TO HAPPEN IN ORDER TO REALISE THE POTENTIAL BENEFITS? 1. PLANNING NEEDS TO HAVE A LEAST-COST DISPATCH MODEL AT ITS CORE Provision of inertia Yes No Provision of primary reserve Yes Yes Storage flexibility Lower Higher Ramps quickly No Yes Potential for future cost falls Limited High Need for large unit sizes Yes No Lead time High Low Seasonal correlation with demand Lower Higher CSP's steam turbine rotates at the system frequency and provides inertia post-fault. Batteries do not provide inertia, although there is debate about the potential for them to provide 'synthetic inertia'. CSP provides primary reserve for a fraction (typically 5-10%) of its full capacity. Batteries provide primary reserve for their full capacity. CSP can only be filled by heliostats and discharged through the CSP turbine. Network connected batteries can effectively be filled by a range of technologies and discharged at any time. CSP ramps on a timescale of minutes. Batteries ramp on a timescale of seconds. CSP components are a relatively mature technology although further optimisation of design may be possible. Many forecast a large fall in battery costs (similar to PV) as deployment expands. CSP costs fall sharply with size units of 200MW+ are favored. Batteries are modular and can be deployed in 5-10MW blocks. Engineering and construction of CSP is complex and has a 4 year lead time. Batteries can be deployed in 1-2 years. DNI (important for CSP) is lower in summer due to humidity & dust GHI (important for PV) is higher in summer compared to winter The role of the capacity planner in the Middle East was in the past a relatively easy task. Gas fired generation was the default option for most of the region. Even if overestimated, surplus capacity would be eliminated quickly by fast demand growth. The task is becoming much more complicated because generation options are more diverse and demand growth is more uncertain. The best choice of capacity addition for a power system depends on: the generation mix and pattern of demand; technology costs and their future pathway; running profile; unit size and lead times; and future potential technology cost evolution. A capacity planner must consider what type of capacity the system : does the system need new baseload or peaking capacity? does the system need additional primary reserve? does the system need sources of flexibility? The system may in fact not need new capacity to ensure security of supply, but there may still be a case for new and lower cost sources to replace older and higher cost sources. Separately, in a world where technology costs are falling (for example in the case of batteries), it may be better to wait for further cost falls before deploying at scale. An evaluation of the large number of alternatives can quickly snowball and can give one a headache. The best framework is to analyse the future dispatch of the system on an hourly basis with different alternatives for the future generation mix. The alternative which meets demand at least cost should then be favoured. This alternative then to be tested for considerations about potential uncertainty in costs, lead times and the benefits of diversity. Tools to simulate least cost dispatch have been at the core of the decision making framework in Europe and America for the last twenty years. Increasing complexity means that planners in the Middle East region are now turning to such tools. These tools 2 can and will deliver $billions of benefit if properly deployed. COMPARING CSP AND BATTERY STORAGE IS DIFFICULT 2. PPA TARIFF STRUCTURES NEED TO EVOLVE TO ALLOW BENEFITS OF STORAGE TO BE CAPTURED Following the Dubai CSP tender result, the debate has intensified on the merits of CSP with thermal compared to battery (or PV in combination with battery ). It is tempting to try and boil this comparison down to a simple LCOE-style metric. However, the reality is that these technologies are inherently different and difficult to compare, as Table 1 shows. The favoured option depends on the current generation mix and what the intended use is. CSP would be favoured if near baseload power is needed. The Dubai CSP project is expected to have 11 to 15 hours of. The additional LCOE cost of adding the equivalent level of battery to a PV profile would be over $100/MWh at today s cost. It is important not to forget other technologies when making such a comparison. A new H-Class CCGT can deliver flexible power for $50/MWh at today s international gas price. Batteries would be favoured if spinning reserve is needed. A good example of this is the open technology auction in the UK for primary reserve that was held in late Seven 50MW battery projects won contracts with prices as low as $9.5/ MW per hour for primary reserve compared to the cheapest thermal plant which offered for $14.5/ MW per hour. Storage has multiple potential uses: provision of operating and standing reserve; voltage control and black start; reduction of electricity production costs through load shifting; ramping capability; and avoidance of network upgrades. Table 2 presents some sample contract tariff structures from around the world. The current approach in the region for CSP is a simple per MWh tariff with a withinday shape against which the generator decides when to dispatch or use the to receive the tariff. This has the advantage of: Simplicity: The tariff structure is simple and easy for developers and financiers to understand. Eliminating dispatch risk: The generator is allowed to self-dispatch rather than being dispatched by the system operator which could result in loss of revenue due to being utilised less than expected or according to a different pattern than was expected. 3 PÖYRY POINT OF VIEW 2 Pöyry s modelling platform BID3 is an excellent example of such a tool - PÖYRY POINT OF VIEW 4

4 This tariff structure means that the full flexibility of the is not available to the system operator. As solar penetrations increase and flexibility becomes more important, it will be vital for the system operator to be able to access more of the flexibility that is provided by the. This will require either: Storage developers to dispatch the against a more dynamic tariff that changes in response to the system flexibility requirements. The ultimate step in this direction would be a spot wholesale market price against which developers could dispatch their asset. System operators to dispatch the which would require a more complex tariff to mitigate the developer s dispatch risk under this option. It is easy to disregard the idea that a familiar PPA tariff structure will need to evolve. However, the rapid renewable growth in Europe has quickly caused fixed feed-intariffs and priority dispatch to be discarded in favour of contractual arrangements that are more dynamic and linked to system supply-demand conditions. TABLE 2 PPA TARIFF STRUCTURES IN SELECTED STORAGE PROJECTS Region Technology Tariff structure Comment South Africa CSP Energy payment (per MWh delivered): 05:00 to 16:30: Base rate 16:30 to 21:30: Base rate*uplift 0 otherwise Spain CSP Capacity payment (per MW installed) US (CAISO) UK (National Grid EFR contract) Battery Battery Wholesale market revenue for the balance of costs Availability payment (per MWh available) Variable payment (per MWh delivered) Start-up payment (per cycle) Availability payment (per MWh available) No other direct payment Storage not explicitly paid for but incentivised through time differential in tariffs MENA and Chile use a similar structure for CSP Minimum level of availability required Forecasting of output required Minimum performance requirements, including a round-trip efficiency incentive Minimum performance requirements Other revenue streams available from energy, capacity markets & avoided charges EXCITING TIMES ARE AHEAD There are exciting times ahead for the Middle East electricity sector. Technological developments give rise to the possibility to improve the way that electricity is generated, reduce the cost to consumers and conserve fossil fuels for export and future consumption. In order to harness these gains, planners need clear thinking and robust analysis to avoid sub-optimal decision making. They also need to be open to adapting the regulatory framework to ensure that renewable generation is properly integrated. The new world will be less straightforward to navigate compared to recent history, but the potential rewards for planners, policy makers and society are huge. TABLE 3 OPTIONS FOR THE PPA TARIFF STRUCTURE IPP dispatches (static tariff) IPP dispatches (dynamic tariff) System Operator dispatches Description Pro Con IPP dispatches against predetermined tariff which incentivise e.g. day/night to encourage a pre-defined dispatch pattern IPP dispatches against tariffs which can be varied by system operator according to system Capex recover through availability tariff Opex recovered through tariff structured to reflect operational costs Simplicity for the developer Flexibility for system operator to change the use according to system Flexibility for SO to change the use according to system Limits dispatch risk for the developer Lost flexibility for system operator to change dispatch patterns according to system Uncertain share of value in delivery payments may make financing more difficult Tariff may become very complex to fully capture asset dispatch constraints May be residual dispatch risk with the developer Netherlands Battery Availability payment (per MWh available) No other direct payment Participates in Primary Reserve market only 5 PÖYRY POINT OF VIEW PÖYRY POINT OF VIEW 6

5 About the Pöyry Point of View Staying on top of your game means keeping up with the latest thinking, trends and developments. We know that this can sometimes be tough as the pace of change continues... At Pöyry, we encourage our global network of experts to actively contribute to the debate - generating fresh insight and challenging the status quo. The Pöyry Point of View is our practical, accessible and issues-based approach to sharing our latest thinking. We invite you to take a look please let us know your thoughts. Pöyry has a global office network - please visit for your nearest office. FURTHER INFORMATION For further information about the subject discussed here and Pöyry s services in the Middle East, please contact: Matt Brown, Vice-President Head of Energy - Western Europe, Middle East and Americas tel matt.brown@poyry.com Brendan Cronin, Head of Management Consulting Middle East tel brendan.cronin@poyry.com Photos: colourbox.com PN /10 Consulting. Engineering. Projects. Operations. Smart solutions across power generation, transmission & distribution, forest industry, chemicals & biorefining, mining & metals, transportation and water experts. 40 countries. 130 offices. Disclaimer Pöyry reserves all rights to this publication. No part of this publication may be reproduced or used in any form without the prior written consent of Pöyry. This publication is partly based on information that is not within Pöyry s control. Pöyry does not make any representation or warranty, expressed or implied, as to the accuracy or completeness of the information contained in this publication. Pöyry expressly disclaims any and all liability arising out of or relating to the use of this publication. This publication may contain projections which are based on assumptions subjected to uncertainties and contingencies. Because of the subjective judgments and inherent uncertainties of projections, and because events frequently do not occur as expected, there can be no assurance that the projections contained herein will be realized and actual results may be different from projected results. Hence the projections supplied are not to be regarded as firm predictions of the future, but rather as illustrations of what might happen.